Davos 2012: The unfinished and the unmentionable

oil refinery in Iran Europe imports a lot of oil from Iran

Anyone who listened to the main sessions in Davos could tell you the top two items now on the to-do list for European leaders: fixing the eurozone's financial firewall and finally sealing the deal on Greece.

But there's a second list I'd like to compile after a few days talking to senior leaders and business people here in the mountains. That's the list of fears, lurking on the sidelines, which could come back and bite us, but no-one wants publicly to confront.

Call it the Davos Unmentionables.

Greece was the big one in 2010: I called it the "unattended baggage at the back of the hall, which everyone was nervous about but no-one wanted to be first to open".

This year, the two unmentionables were Portugal and the price of oil.

Portuguese debt

As I mentioned in my Today package on Saturday, in the calmer waters which Europe's financial markets seem to have sailed into, Portugal is a bit of an iceberg.

We won't necessarily hit it. But, as one G20 finance minister said to me privately this week, "it's one to watch".

Portugal has singularly failed to share in the fall in the cost of borrowing for eurozone governments since the ECB did its stuff in December.

In fact, the interest rate - or yield - on Portuguese sovereign debt has risen relentlessly, especially in the last week, as the deal to cut the value of Greek debt owned by the private sector has moved closer to a reality.

Put simply, private sector creditors think Portuguese bonds will be next for the Greek treatment. That's despite all of European officialdom insisting that "private sector involvement" in bailouts will never happen again.

We shall see who turns out to be right. What is clear is that Portugal is in a very bad way economically, and is not going to meet its deficit targets this year without further Herculean budget cuts. It could well be heading into the kind of downward spiral that the US Treasury Secretary, Tim Geithner, warned about in Davos.

Portugal has a gaping current account deficit, a shrinking economy and 7.5% of GDP's worth of austerity in train, for 2011-12 alone. Its debt has jumped from 70% of GDP to 110% in just three years and its deficit is still going up.

That said, Portugal's borrowing needs in 2012 are not that big - around 17bn euros ($22bn; £14bn). If officials grapple with the Portugal issue early, and decisively, they could avoid the iceberg. But looking at how the last two years have been handled does not exactly inspire confidence.

The spike in Portuguese bond yields could signal trouble for Europe. An unexpected spike in oil prices in 2012, due to a stand-off - or worse - with Iran would be a problem for nearly everybody.

Iranian oil

All the mainstream forecasts for global growth in 2012 assume a flat or falling price of oil. Last year's updated IMF forecasts, for example, assume the average price of oil falls from around $105 per barrel last year to $100 in 2012 and $95 in 2013.

For the UK, you'll remember the likely fall in inflation (helped by stable or falling oil prices) was one of my biggest "reasons to be cheerful" in 2012.

US and EU sanctions on Iran could well mess with these hopes, especially if Iran decides to cut oil shipments well before the EU sanctions formally come into force. In the past few weeks, Iran's leaders - and its parliament - have been talking about doing precisely that.

Iran exported roughly 2.2 million barrels of crude per day in 2010, equivalent to around 2.5% of global demand. A good chunk of that oil went to Europe, unfortunately quite a lot of it to the countries in crisis. Around 15% of the oil imported by Spain, Greece and Italy comes from Iran.

The oil price has crept up in recent weeks, but if you want to insure yourself against a major price spike later in 2012, you can do it very cheaply. The market just doesn't think it's very likely.

There are lots of sensible reasons for traders to be relaxed. Saudi Arabia has pledged to increase its production, if necessary, to keep the oil price stable; the US financial sanctions, which would make it very difficult for Iran to get paid for its oil, have quite a lot of flexibility built into them; and the EU sanctions are likely to be phased in.

And yet, this is the oil market we are talking about. And Iran. Neither exactly has a reputation for stability, or predictability.

Senior Israeli politicians at Davos were suggesting privately that there was a one in three chance of some form of violent confrontation with Iran this year.

Of course, Israel has an interest in talking up the threat posed by Iran. But the noises coming out of Tehran are not exactly reassuring. You have to wonder whether the rest of the world - including traders in oil futures - is taking it seriously enough.

The EU Summit this week will be an opportunity for European leaders to get on with curing the economic headaches we already know about. Here's hoping that Portugal and Iran don't give them a lot more.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 19.

    17. stanilic

    Imagine if the concept of the Euro had been openly debated and its implications scrutinized at Davos.

    Would it have been rejected as unworkable?... we'll never know.

  • rate this

    Comment number 18.

    What has Israel to do with this gathering? They are in the Middle East, not Europe. THeir powerful lobbies should be resisited as they try to stir up war on Iran at these sort of meetings. The just outcome would be if Davos posted a resolution for economic sanctions against Israel for war crimes and crimes against humanity.

  • rate this

    Comment number 17.


    I have no problem with communicating with others but when that leads to nothing we have no more than a talking shop.

    Without a vision, a way to go forward, or even the initiation of a discussion towards a vision then communication becomes just another confused chorus.

    The truth is there is a problem and nobody knows what to do without endgangering their own interests. A waste of time!

  • rate this

    Comment number 16.

    Japan is surviving a prolonged period of low growth. The Japanese philosophy of "Kaizen" ( continuous improvement of things that work), rather than bright-eyed and bushy-tailed debt-led expansion, is a solid basis for stability. Company loyalty is strong because pensions rely upon their survival.
    Davos is a meeting of adherents to our failed philosophy. Capitalism needs to adopt kaizen.

  • rate this

    Comment number 15.

    How much did it cost? Who paid for it? Who drew up the list of attendees? Just a few questions off the top of my head, none of which will be asked (never mind answered) by the media- oh, wait a minute, the media already have their invites, so what's the problem? Am I the only person who sees a democratic deficit here? Decisions affecting the future of billions should not be made in private.

  • rate this

    Comment number 14.

    Most above have questioned the point of Davos (some times referred to as Davros by BBC which is more appropriate) and I agree it does seem pointless. It seems to serve the purpose of helping the filthy rich feel a little less guilty about the damage and chaos they wreak on the rest of us by appearing to concern themselves with the problems of the world - opportunity for Hestor contrition missed.

  • rate this

    Comment number 13.

    I'm surprised that the usual amount of hot air coming out of the Davos beano for the high and mighty hasn't melted a good proportion of the snow on The Alps.

    Does anything worthwhile ever come out of these jolly get togethers?

    Still, I'm sure they have all enjoyed the luxury afforded to them high up in their snow-capped ivory tower.

  • rate this

    Comment number 12.

    What changed? Davos representatives came; they feasted & talked. But what changed? There were no resolutions, decisions? All I noticed was a huge divide on even more huge array of crucial issues - from trade imbalances & currency valuations to the threats posed by Iran & North Korea.
    Chaos came; chaos walked out door.

  • rate this

    Comment number 11.

    As I and others have said a 'mediafest' with an agenda too hot to make decisions on. In the beauty of the Alps for a week, just the place to play slow-ball on everything.

    In the embarressing industrial wastelands of provincial UK this 'jolly' would only last a day, making quick decisions just to get back to the unreal and priviliged world they inhabit at the UK taxpayers expense.

  • rate this

    Comment number 10.

    2. stanilic

    I can't think of a crisis that resulted from too much communication.

    In a volatile world, the exchange of ideas and perceptions is to be welcomed. Attitudes can be changed and common problems recognized.

    I'd accept a monthly Davos if it resulted in greater collaboration.

  • rate this

    Comment number 9.

    At some point it won't be small countries like Greece & Portugal we'll all be talking about.
    It will be the US & China.
    The slowdown will affect Chinese exports & their purchase of dollars, which will make the holding of dollars even less desirable.
    A real crisis in the value of the dollar that underpins the capitalist world - it's just a question of when.

  • rate this

    Comment number 8.

    "Call it the Davos Unmentionables"

    Sounds like a plausible, polite collective term for a meeting of world politicians, economists and big business.

  • rate this

    Comment number 7.

    Davos 2012 is slightly somber. Afterall, it's clear financial crisis is not over; worst may be yet to come. Suddenly the dying MIDDLE CLASS has jumped to # 1 priority. Merkel called for provision of increased resources for the EU bailout fund in order to “firewall” countries like Italy & Spain. She told forum Germany is concerned - being now only major EZ economy with triple-A credit rating.

  • rate this

    Comment number 6.

    I love all this talk about the end of capitalism, the death of capitalism, the crisis of capitalism. The bailout banditry have witnessed in last decades is anything but capitalism.
    As for Iran: the drums of war are beaten by young men who have never fought, and silenced by old men who have.
    We will never learn. This is the lesson of my life. And it is so incredibly shameful and sad.

  • rate this

    Comment number 5.

    Davos yet another round of inept politicians incapable of addressing the real problems,but content to trim round the edges rather than address what NEEDS to be done
    The unmentioned here is that the EU has now planted unelected officials into charge of TWO independent countries.
    With this diktat and control approach, soon theEU will resemble the USSR, which I assume was what the founders copied?

  • rate this

    Comment number 4.

    So a meeting held in a luxury sky resort between the people that have by far gained the most from the way things were in the past (and things to stay like that at any cost) has failed to find a solution for the problems caused by the massive changes of peak-energy, the peak of the debt super-cycle and the great global equalization of wealth, all of which threaten the foundations of their wealth.

  • rate this

    Comment number 3.

    I used to believe the hype that the whole Davos thing was some conspiracy, but it's not. It's just a gathering of the fairly clueless trying to lead the seriously clueless with the sensible heads not getting a look in.

    This years theme seems to be denying the obvious & pretending it'll all be alright in the end.....not without actions to move on us a different course it won't be.....

  • rate this

    Comment number 2.

    Forgive me for asking; but what is the point of Davos?

    Is it just a big bun-fight for the media or a place where the great and good communicate to help ease the strenuous passage of our times?

    It would seem that nothing comes out of it other than what went in. This suggests it has no functionality at all. Why bother?

    It it yet another tabernacle filled with the idols of failed gods\/

  • rate this

    Comment number 1.

    Davos has been nothing less and more than a brainstorming how to tackle the consequences of "excessive capitalism" expressed in the failures of the financial sector and distastfeful banker bonuses and the implications of the Eurozone´s debt "endless" debt crisis.


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